Targeted Population Testing Proxies

Published by John Sciarretti on Saturday, March 1, 2014
Journal thumb March 2014

Question: Can a business rely upon proof of an individual customer’s participation in other federal programs targeted specifically to low-income individuals and families (e.g., Medicaid) as a proxy for income documentation under the targeted population rules?

Answer: It may be possible, but issues related to timing would pose challenges. Under the new markets tax credit (NMTC) regulations, an entity qualifies as a qualified active low-income community business (QALICB) serving targeted populations if at least 50 percent of its gross income is “derived from” sales, rentals, services or other transactions with low-income persons, at least 50 percent of its ownership is by low-income persons, or at least 40 percent of its employees are low-income persons. In general, a person is considered low-income in a metropolitan area if his or her income is not more than 80 percent of the area median family income; and in non-metropolitan areas, if his or her income is not more than the greater of 80 percent of the area median family income, or 80 percent of the statewide non-metropolitan area median family income. The final NMTC regulations allow a business to measure family income of a person using a range of methods, including the method employed by the U.S. Census Bureau, the method used by the U.S. Department of Housing and Urban Development (HUD) or household income as reported on Form(s) 1040. Under the Form 1040 method, an individual’s family income includes the income of any member of the individual’s family if the family member lives with the individual.

The preamble to the final regulations rejects the idea that a person who qualifies under the income guidelines of other federal programs targeted specifically to low-income individuals and families may use such qualification as a proxy for meeting the targeted populations requirements on the grounds that the Internal Revenue Service (IRS) and Treasury Department haven’t analyzed other federal programs to determine whether they meet the statutory requirements under Internal Revenue Code section 45D(e), and whether programs currently meeting the requirements will continue to do so in the future. Nonetheless, it seems reasonable that if a business can establish that a governmental program operates under the same (or lower) income limitations as the NMTC requirements and measures income consistent with the range of methods provided in the regulations, a business should be able to rely on such data to substantiate a person’s income as meeting the targeted populations limitations.

The problem, however, is timing. Even if a business can establish that income limitations and measurement methods of another targeted government program are consistent with the NMTC program’s targeted population rules, the difficulty lies in determining whether or not a person qualifies under the proxy program at the time they were receiving products or services from the new markets business. Under most targeted government programs, eligible recipients have one year of presumed eligibility before they have to recertify. In the event a person’s circumstances change during that year and they fail to notify the government, they could be falsely certified. A business will have no way of knowing for certain, without direct verification, whether a customer who qualified under the proxy earlier in the year, still qualifies. Therein lies the problem of solely relying on a proxy.

Many businesses, especially those in the social service sector, would benefit from rules that enable a business to rely on other federal programs targeted specifically to low-income individuals as a proxy for income documentation under the targeted population rules. However, even though a business may establish that such program’s guidelines and methods are akin to that of the NMTC, the timing of certification, unfortunately, makes it difficult to rely solely on this approach under current NMTC rules.